Toshiba Inflated Earnings by $1.2 Billion, a Panel of Experts Says

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Hisao Tanaka, the chief executive of Toshiba, bows at a Tokyo news conference in May.CreditCreditIssei Kato/Reuters

By Jonathan Soble

July 20, 2015

As top executives pushed subordinates to meet unachievable financial targets, Toshiba, the Japanese industrial giant, overstated its earnings by more than $1.2 billion over the last seven years, in what is emerging as one of the country’s largest corporate accounting scandals.

The discrepancies, detailed on Monday in a report by a committee of independent experts hired by the company to examine its accounting practices, point to a systematic problem that reached the upper echelons of Toshiba. Hisao Tanaka, Toshiba’s chief executive, and his predecessor, Norio Sasaki, who is now the company’s vice chairman, plan to announce their resignations on Tuesday, Japanese media reported.

The problems, the report found, date back to the deep economic slump set off by the global financial crisis in 2008. Managers across Toshiba’s many divisions then began taking accounting shortcuts to meet increasingly difficult profit goals imposed by superiors.

The committee said the implicit pressure was enough to prompt managers to misreport earnings from their divisions. It accused Toshiba of breeding “a corporate culture where it is impossible to go against one’s bosses’ wishes.”

In some cases, the pressure was more direct.

The committee said it discovered “systematic involvement, including by top management, with the goal of intentionally inflating the appearance of net profits.” The company’s most senior leaders were aware of some of the allegedly misleading accounting, it said, and its accounting department “deliberately provided insufficient explanations to auditors, with the intention of carrying out a systematic cover-up.”

Toshiba did not dispute the findings, but said it would not address them directly until Tuesday.

Questions about financial reporting by Toshiba, one of Japan’s largest manufacturing groups with products ranging from refrigerators to nuclear power plants, have been brewing since the company said in April that it was examining possible improprieties in past earnings statements. Since then, its share price has tumbled by more than 20 percent.

The four-member investigating committee, headed by a former prosecutor, found overstated profits totaling 151 billion yen since 2008, an amount equal to $1.21 billion at current exchange rates. An additional 4.4 billion yen of overstated profit had previously been discovered by the company itself, the report said.

The scale of the misreporting that the company is being accused of is on a par with Japan’s most recent accounting scandal, at the camera maker Olympus, which came to light in 2011. Olympus admitted that it manipulated accounts to cover up investment losses incurred years and sometimes decades earlier. Several former executives have since been convicted of securities violations.

Japanese securities regulators are examining Toshiba, according to local media reports.

The investigating committee hired by the company interviewed 210 people, including executives and auditors, according to the report. It found problems in all six of Toshiba’s primary divisions — businesses like semiconductors, consumer electronics and power plants.

Managers used a variety of techniques to improperly increase earnings, the committed said. These included underreporting the cost of raw materials and components; reporting uncertain future income — some of which would never materialize — as though it were cash in the bank; and delaying write-offs related to canceled contracts and other business setbacks.

Problems were particularly widespread in the company’s infrastructure division, which produces equipment for the electric power industry, including conventional coal and gas power plants as well as nuclear reactors. The committee flagged 15 separate instances in which it said Toshiba failed to set aside adequate reserves against the risk of cost overruns, construction delays and other problems

While the committee did not identify specific projects, some involved Westinghouse Electric, the nuclear subsidiary, which analysts have long seen as a particularly heavy financial millstone for the company.

Toshiba’s acquisition of Westinghouse in 2006 for $5.4 billion is widely seen as having been expensive and ill timed. Then the nuclear meltdowns in Fukushima in 2011 crippled the atomic power industry in Japan. The revolution in shale oil and gas extraction, combined with new safety concerns after Fukushima, have slowed demand for the technology.

The biggest single year for profit overstatement was after the Fukushima disaster, fiscal 2012, the committee said. That year, the committee said, Toshiba overstated its profit by 85.8 billion yen, an amount equal to more than half the total, the committee said.

A version of this article appears in print on , on Page B2 of the New York edition with the headline: Panel Finds Accounting Irregularities at Toshiba. Order Reprints | Today’s Paper | Subscribe